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The Forum > Article Comments > Oil subsidies and Asian diplomacy > Comments

Oil subsidies and Asian diplomacy : Comments

By James Norman, published 11/7/2008

By saying that Asian countries have to halt their food and petrol subsidies leaves the door open for Australia to be accused of reckless meddling.

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This article reminds me of something else I read recently, in relation to Peak Oil. The arguments on that thread were running along the lines of "Peak Oil" will be solved by Adam Smith's "invisible hand".

One of the responses posted was along the lines of "yes you are right, and in fact the invisible hand was already hard at work". He pointed our that whereas we have only seen price rises so far, that is just because of Adam's wonderful "invisible hand". There are no shortages here because the people who can't pay the higher prices have to do without. So oil fired generators in Africa have shut down. Poorer farmers can not longer afford oil based fertilisers or oil based transport and the people that depend on them can't import food that has instead been used to make biofuels. As a consequence food prices have risen 100% in places where people used to spend 70% of their income on food.

Yes indeed, we in Australia have much to thank Adam Smith's invisible hand for.
Posted by rstuart, Friday, 11 July 2008 1:42:48 PM
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The author has made the fundamental error of focussing on the current benefits of fuel subsidies, while ignoring the costs. And focussing on the costs of removing fuel subsidies while ignoring the benefits.

Government subsidies distort markets and cause misallocation of scarce resources and these misallocations, in the long run, can only lead to even greater hardships.

Since subsidies are funded by taxation, the most obvious benefit of removing subsidies is matching them with a corresponding reduction in taxes. Further, it is well known that tax collection entails deadweight costs and removing these costs would provide further benefits to society.

Secondly, government subsidies are contributing to high world oil prices. Demand for oil would fall if all countries removed subsidies thus resulting in lower prices for everyone. This would have other indirect benefits as lower oil prices would lead to lower transportation and food prices.

A third benefit is that the market would be freer to explore alternative energy sources which currently have been handicapped by the artificial advantage given to gasoline and diesel fuel. This applies to both producers and consumers.

Fourthly, government subsidies are often inequitable. I wonder how many people who don't own cars are paying taxes to subsidise fuel for those that do.

Fifthly, in the long run this policy is unsustainable. Resources diverted to subsidising fuel is unavailable for more worthwhile activities, and could lead to higher taxes and/or growing budget deficits financed by debt or printing money - the Zimbabwe route. Better to cut subsidies now before they cause bigger problems later.

Finally, I see that Thailand's inflation rate is around 8%. This suggests that the authorities need to work harder to fight inflation and maintain a strong currency. A strong currency would minimise the impact of rising fuel prices.
Posted by ed_online, Friday, 11 July 2008 2:08:44 PM
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Rudd is a servant of 'big oil' toeing the line and the US deputy sherriff.
An interesting article in the Asian Times on oil prices detailed how Bush, Enron and energy companies had pushed legislation through the US Assembly for the unseen ramping up of oil prices. The speculators are responsible along with the petrol/oil cartels of deliberately ramping up the price by 60percent. There is also a very close connection mirroring itself to the stealing of oil in Iraq which the article does not mention.
"The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders. Then, to make sure the way was opened to potential market oil price manipulation, in January 2006, the George W Bush administration's CFTC permitted the ICE, the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of US crude oil futures on the ICE futures exchange in London - called "ICE Futures".Persons within the United States seeking to trade key US energy commodities - US crude oil, gasoline and heating oil futures - are able to avoid all US market oversight or reporting requirements byrouting their trades through the ICE Futures exchange in London instead of the NYMEX in New York. Is that not elegant? The present chief executive officer of NYMEX, James Newsome, who also sits on the Dubai Exchange, is a former chairman of the US CFTC. In Washington doors revolve quite smoothly between private and public posts."

Dollar and oil link
"A common speculation strategy amid a declining US economy and a falling US dollar is for speculators and ordinary investment funds desperate for more profitable investments amid the US securitization disaster to take futures positions selling the dollar "short" and oil "long".For huge US or EU pension funds or banks desperate to get profits following the collapse in earnings since August 2007 and the US real estate crisis, oil is one of the best ways to get huge speculative gains."
Posted by johncee1945, Friday, 11 July 2008 6:21:29 PM
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So what if traders can avoid govt oversight? So what if pension and hedge funds are investing in oil? These investment decisions, in themselves, do not fully explain the increase in oil prices.

I don't believe the high oil price are caused by speculators, they are being used as scapegoats by govts to avoid scrutiny of their failed energy policies. Especially in the USA were Alaska and over 80% of the US Coast is off-limits for drilling.

But also by the Saudis who could easily increase oil production, but choose not to.

And, of course, developing countries which are spending something like $100bn per annum on fuel subsidies.
Posted by ed_online, Friday, 11 July 2008 11:54:55 PM
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To ed online who says "So what if traders can avoid govt oversight?"
This is a distortion to the article I referred to and its content. Whereby the real relations are inverted. You imply the traders are hampered by the government.
Clearly, it is the government who are abusing their trusted positions, unhindered and unseen, supported lock, stock, and BARREL by the 4 Anglo-American oil/petrol cartels and the predatory speculators. THEY have created the conditions for the ramping up of oil and petrol prices whilst millions around the world suffer direct consequences. The latest estimates for a few years down the road mention $8 a litre. At present there is NOT a shortage of crude oil, in fact, some supplies are being held back to release stocks in line with rises in the futures market and to extend this boom. And the speculators are betting on the futures market!
For predatory lending in housing US economists are predicting 2.5 million US homes will enter the foreclosure process this year with bank repossessions soaring 171 percent. The speculative bubbles over just the last ten years have poured billions of dollars into the pockets of financial operators. And the predators ramping up basic food grains have created food riots and unnecessary starving. It is increasingly likely that the American population, mostly workers, will be forced to pay for the disaster brought about by years of parasitic and reckless financial swindling. These financial operations sometimes called "asset creating" by the "players", code words for every nefarious activity. Such as selling the dollar "short" undermines the US economy and oil "long" do have real consequences. Job losses in the US are mounting as inflation, the credit crunch, plunging home values, tighter family budgets, and bubbles are combining to produce a perfect storm of economic malaise, which is threatening the livelihoods of tens of millions of working people. I would argue that the US economy is now in free fall. These aspects must surely be mirrored here, different but similar.
Posted by johncee1945, Saturday, 12 July 2008 6:05:05 PM
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While it might be fun to spin conspiracy fantasies about "predatory speculators" and "Anglo-American oil/petrol cartels" these explanations just don't cut it. No single nor collection of speculators can possibly manipulate prices.

Futures traders are trading contracts, pieces of paper, not actual barrels of oil. Basically, these contracts are bets on future prices. Contracts cannot be traded unless there is both a buyer and seller, one who thinks prices will fall and the other that they will rise. Since both can't be right, one will make money and one will lose money, i.e. its a zero-sum game.

I'm not sure what you mean by the "Anglo-American oil/petrol cartels" but its worth noting that the dozen largest oil companies in the world are owned by OPEC (i.e. non-American) governments. And its also worth noting that cartels never last.

You are looking in the wrong places, the basic cause of high oil prices is unprecedented demand emanating from the developing countries such as India and China. And this is being made worse by fuel subsidies of around $100bn a year. It is also being made worse by the political influence of environmentalists, particularly in the USA, where drilling is prohibited in Alaska and 80% of the coastline.
Posted by ed_online, Sunday, 13 July 2008 12:45:55 AM
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